Free Cash Flow (FCF)
Free cash flow is operating cash flow minus capital expenditures. It is the cash a company is genuinely free to use: for buybacks, dividends, paying down debt or acquisitions.
How to read it
Profit is an accounting concept; cash flow is real money. Over the long run free cash flow should roughly track net income, and if it runs well below net income for an extended period, find out why.
Free cash flow divided by market cap gives the free cash flow yield, which can be compared directly with Treasury yields. It is a common way to value mature companies.
Asset-heavy companies and those in the middle of a big investment push (cloud providers building data centers, for instance) have high capital expenditures, which can depress free cash flow for a time.
Common pitfalls
- Stock-based compensation does not consume cash, so companies that pay employees heavily in stock show free cash flow that looks better than the underlying reality.
On FinDog
The quarterly financials page for each stock lists free cash flow by quarter. The "Balance Sheet" section of each earnings analysis page notes how much cash went to buybacks and dividends during the quarter.
See it on a stock page →Related terms
- Share BuybackA buyback is a company using cash to repurchase its own shares on the market and retire them. With fewer shares outstanding, earnings per share and each share's claim on the company both go up. It is the other way, besides dividends, of returning capital to shareholders.
- Operating MarginOperating margin is operating income divided by revenue. Operating income is what remains of gross profit after operating expenses such as R&D, sales and marketing, and general and administrative costs, so it reflects the overall profitability of the core business.
- Non-GAAP EarningsGAAP stands for U.S. Generally Accepted Accounting Principles. Non-GAAP figures are "adjusted" numbers that a company calculates itself by starting from GAAP and excluding certain items, most commonly stock-based compensation, amortization of acquired intangibles and restructuring charges.